Loans Versus Lines of Credit
When it comes to finding the right funding for your business, your two biggest options are loans and lines of credit. These are the most popular and support large and small businesses around the world, so it is a good idea to compare each to your needs and go with the best fit.
How Each Works
A credit line for business operates in much the same way that a personal credit card does. You will have a maximum amount that you can use at any given time and pay it back with interest over time. You can use this line again and again if you keep paying it back. You can get these lines through your bank or through other lenders and sometimes your supplier will allow you to open a credit line with them.
A loan, on the other hand, is a finite amount of funding that is used, paid back with interest, and the term closed. Some types of loans, such as some business construction loans, have funding disbursements at different phases but will not be a revolving line like a credit card. Banks and other lenders provide various types of loans for business and some can even be partially guaranteed by the Small Business Administration.
Uses for Each
Since loans are generally higher funding amounts, most companies use them for purchasing real estate or equipment needed for doing business and save lines of credit for smaller purchases like buying supplies. Some SBA loan programs will have even more specific requirements such as the CDC/504 loan program which helps guarantee loans used to buy, build and renovate real estate which is more than fifty percent owner-occupied or to purchase heavy equipment.
Considerations
When comparing credit lines and loans, it is important to consider things like term lengths, interest rates, and what you will be using the funding for. Bank loans are generally long-term loans with relatively low-interest rates while credit lines are short-term revolving loans with higher interest rates. Many loans are secured, meaning that collateral is used to guarantee the funds, and the collateral can be the items purchased such as a mortgage or car loan. Credit lines are unsecured but rely heavily on personal and business credit.
Lines of credit and business loans are both good sources of funding for your business, but each will have different benefits and uses. For example, it can be easier to secure a credit line, but the interest rates on bank loans are usually lower. The best way to choose between them is to compare both to your needs and pick the best fit.
